The IRS introduced on September 14, 2023 a processing moratorium on new worker retention credit score (ERC) claims. This means that it’ll not course of any newly filed ERC claims till it really works via its backlog of greater than 600,000 claims, which it estimates won’t happen till subsequent 12 months. The moratorium doesn’t imply that the IRS is shutting down the ERC program as a result of the IRS doesn’t have the ability to try this; solely Congress and the President can try this. It additionally doesn’t imply that the IRS is refusing to pay legitimate ERC claims that had been already filed or will probably be filed sooner or later. It simply implies that there will probably be delays in receiving checks.
The acknowledged purpose for the processing moratorium is to stop fraudulent ERC claims, which the IRS claims to be receiving with rising frequency. The IRS has the dual targets of defending the fisc and defending “honest small business owners from scams.”
What Does This Mean For New ERC Claims?
If a enterprise has a legitimate ERC declare, the very best plan of action is to file the declare as quickly as attainable and the IRS will get to it when it will get to it. Remember that there are two separate submitting deadlines for 2020 claims and for 2021 claims. The deadline to file 2020 claims is April 15, 2024, and the deadline to file 2021 claims is April 15, 2025. These are agency deadlines and no extensions or exceptions are permitted.
The deadlines for taxpayers to file claims are to not be confused with the statute of limitations for the IRS to disclaim ERC claims. They are ruled by separate statutes. If a enterprise well timed filed its unique 941s and no fraud is concerned, then the IRS has till April 15, 2024 to disclaim 2020 claims, it has till April 15, 2025 to disclaim Q1 and Q2 2021 claims, and it has till April 15, 2027 to disclaim Q3 and This autumn (for restoration startup companies) 2021 claims. In addition to the common statute of limitations, there’s a second rule that permits IRS, along side the Department of Justice (DOJ), to convey a lawsuit to get well an faulty ERC declare inside 2 years after it pays the declare, or 5 years if the declare entails fraud or a misrepresentation of a cloth truth. It just isn’t clear how typically, if in any respect, the IRS will use this second rule to pursue taxpayers as a result of it’s required to coordinate with DOJ and truly file a lawsuit, which is extra burdensome that simply assessing tax throughout the common statute of limitations.
Additionally, Congress may step in at any time and lengthen the statute of limitations. This is unlikely to happen due to the present gridlock in Washington, however it could be a income raiser.
If a enterprise doesn’t have a legitimate declare, the very best plan of action is to desert it and never transfer ahead. The IRS is on “high alert” with regard to specious ERC claims and it’s aggressively auditing each new claims and claims that had been already paid. Also, take into account that the IRS can assert penalties on claims it has paid and on claims that it audits or denies earlier than they’re paid. The final level, that penalties can apply even when the declare just isn’t paid, will in all probability come as a shock to many taxpayers and must be factored into the submitting calculus. In different phrases, enjoying the audit lottery is dangerous.
What Does This Mean For Previously Filed ERC Claims?
The principal influence the announcement can have on beforehand filed however unprocessed claims is that the IRS will take longer to course of them as a result of it’s making use of heightened scrutiny to all present claims. The IRS acknowledged that its processing time for these claims “will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit.”
What Does This Mean For IRS Audits of ERC Claims?
Nothing, actually. The IRS was already on heightened alert for improper ERC claims, and IRS auditors are already working these circumstances on expedited timelines.
The IRS additionally signaled that two essential initiatives will probably be forthcoming. The first is a settlement program for taxpayers whose claims have already been paid. No particulars on this program had been launched aside from it should enable “businesses to avoid penalties and future compliance action.” More particulars about this program are anticipated within the coming months.
The second initiative is a withdrawal possibility for taxpayers which have a pending declare, together with unprocessed claims and claims below audit. The withdrawal possibility will enable taxpayers to keep away from reimbursement points and, presumably, penalties on the unpaid declare. The withdrawal possibility is anticipated to incorporate all unpaid claims within the IRS backlog, however it’s not anticipated to exempt taxpayers from potential legal publicity in the event that they filed a fraudulent declare. More particulars about this initiative are anticipated within the coming weeks.
Protective Refund Claims
There is yet another essential level that has not acquired numerous consideration – protecting refund claims. A protecting refund declare is a refund declare that’s filed throughout the limitations interval to protect a taxpayer’s proper to say a refund after the constraints interval, and after the problem raised within the protecting refund declare is resolved. Protective refund claims acquired numerous consideration in March and April of 2020 when the Supreme Court determined to think about the constitutionality of the Patient Protection and Affordable Care Act. The concern then was that if the Court declared the legislation unconstitutional, then the web funding revenue tax and sure different taxes may very well be invalidated too, thereby giving rise to potential claims for refund.
Similar considerations come up with regard to ERC claims that aren’t paid or are required to be repaid. Recall that the ERC is taxable by the use of expense disallowance – taxpayers are required to amend their 2020 and 2021 federal revenue tax returns to scale back the bills that gave rise to their ERC claims. The revenue tax return amendments are required to be made on the time the ERC declare is filed, regardless that the ERC declare is probably not paid till many months later.
This association works superb so long as a taxpayer’s ERC declare is rarely audited or the taxpayer prevails on audit. But if a taxpayer amended its federal revenue tax returns to pay tax on the ERC after which by no means receives the ERC, or has to repay the ERC after an unsuccessful audit, then will probably be whipsawed, i.e., it should have paid tax on an amount of cash that it by no means acquired. To guard towards this, taxpayers ought to contemplate submitting protecting refund claims to reverse the expense disallowance regarding the ERC, significantly with regard to the 2020 tax 12 months as a result of that refund deadline expires in early 2024 for taxpayers that didn’t file on extension.